The Individual Stock Trader

With the invention of the internet and the ongoing digital transformations, many everyday practices changed. I believe that one many of us can relate to, is stock trading for individual investors and the business models of the brokers we use.

In the traditional setting, we notice that a lot of communication is needed for buying or selling stocks. The brokers must actively seek to acquire a client base and then do research about the financial market to generate stock ideas. They will then communicate buy/sell recommendations to clients over the telephone and finally the brokers would then use their systems to order the stocks with their people on the trading floor. With this much communication and systems needed, cost for placing orders were high. This means that stocks had to rise (or fall) a lot before a profit was made. (Beattie, 2015)

Because more and more people started connecting through the internet a new type of stock brokers emerged: Online Traders. The first company to offer this online trading was K. Aufhauser & Company in 1994 (!). On its website “WealthWEB” individuals were now able to order stocks directly and therefore minimizing the role of the agent they had to contact in the past.

With this development there was also a big change in the business models of brokers. In the traditional setting, brokers generated revenues from mostly payments for orders and trading commissions. They generated a lot of revenue on relatively few people.

The quality of traditional brokers varied dramatically across individuals, making it hard for investors to choose the best among them. Also, it is difficult for investors to discern whether or not the brokers have made a well-informed recommendation after only having had a brief telephone conversation. (Wu et al, 1999)

According to Wu, the online trading model however, is much more dynamic. Because of the huge amount of data available the investor got a much more active role in his own portfolio. With the Internet serving as an information gateway, the investor can do everything that the retail brokers used to do. With online trading, they can make their own decisions, and trades are executed instantaneously, at essentially the same price.

The business model for online brokers today is about delivering service and value. Convenience, control, accessibility and low commissions make online investing very attractive to individual investors. They generate revenues mostly from trading commissions, net interests from margin accounts, and (sometimes) payments for orders. Their goal is to generate highest possible traffic through an effective system with quality service. So in contrary to traditional brokers, they try to make profit through volume. (Investopedia, 2015)

To conclude, through digitalization and a change business models we can now trade stocks faster, cheaper and more convenient than ever before.

Share this:

Like this:

Related

2 responses to “The Individual Stock Trader”

Do you think trading has become too fast-paced due to technology? One such example is Flash Crashes, a term used for stock markets collapsing within minutes. I find it a fascinating topic, if you are interested in the risks of high frequency trading, you could look into this article: Baumann, Nick. ‘Too Fast To Fail: How High-Speed Trading Makes Wall Street Disasters Worse’. Mother Jones. N.p., 2015. Web. 9 Sept. 2015. http://www.motherjones.com/politics/2013/02/high-frequency-trading-danger-risk-wall-street

Indeed, the internet has transformed the brokerage industry, demolishing their hefty commissions on trades as well as has sped up the speed of trading. As you mentioned, today you can buy and sell financial products immediately from your digital device wherever you are. By focusing on higher volume firms can offer lower commissions for trades compared to banks as well as brick and mortar brokers.

However, the brokerage industry around the world will most likely be hit by yet another shock to their business models in the next few years – making today’s successful models of charging commission obsolete (however low). Dutch broker DEZIRO (baby sister of online broker DEGIRO) will enter the online brokerage market worldwide in 2016 disrupting, and possibly completely changing, brokerage revenue models from commission based to ad-powered.

What does this mean for traders worldwide? Well free trading!

Where will DEZIRO make their money? From advertising on your screen!

Ad-based revenue models are becoming ever more common for online service providers, especially in Silicon valley – Facebook and Google are well known examples who’s revenues derive almost solely from advertising. This means offering some of their screen space to sponsors external advertisers. Whether this revenue model can be applied to DEZIRO and remain profitable remains to be seen. Advertisers only start paying the big bucks when there are enough visitors on a website – hence the question remains if DEZIRO will be able to attract enough customers to gain enough advertiser interest. The company is currently testing demand worldwide through having a waiting list on its website (www.deziro.com) and will begin opening the trading platforms in 2016 based on the perceived demand.

It will be definitely be interesting to see if DEZIRO’s revenue model will actually be profitable in the long run and whether it will yet again change how brokers operate and change their future revenue model. If the ad-revenue model works for DEZIRO, it may very well be applicable to other financial services, where commissions are (sadly) still astronomically high.

Featured Posts

Grocery shopping is a time-consuming activity, especially in todays frantic world where time is of essence to most people. The rise of both partners in a household having stable jobs minimises the time available to do groceries even further. According to market research by US company Time Institute, the average customer spends 41 minutes in […]

Facebook, Instagram, Twitter, Airbnb, Amazon & co. We use online platforms and services all the time. Some more frequent than others. Some for social purposes, others for commercial ones. But what all these platforms have in common: they collect user data. (And we produce a lot of it, up to 2.5 quintillion bytes per day!) […]

Along with tackling the premise of information asymmetry in its online web shop, L’Oréal has acted upon a very strategic and innovative way of testing make up with the use of an app that integrates augmented reality within its system. Instead of going to crowded drugstores, being frustrated by the fact that trial makeup is […]